As it assumes the G20 presidency, Germany has set its sights on the fintech community, calling for the development of a set of common criteria for the industry's regulatory treatment in an effort to avoid a race to the bottom, says Bundesbank president Jens Weidmann.
During the G20 conference, Weidmann offered an upbeat picture of digital finance and how a host of fintech startups can widen access to banking services both in the developed and developing world.
But while hailing the many benefits of financial inclusion, Weidmann warns that there is a trade-off between it and financial stability.
"Expanding access to financial services - especially to credit - at too fast a pace and with too little control exposes economies to stability risks, and households to the risk of over-indebtedness," he says.
With new players entering the field, it could become more difficult to tell who is exposed to whom, and to determine where risks ultimately lie. Weidmann also notes that fintech business models have not yet run through an entire credit cycle, so experience with them in economic downturns is limited.
Picking up on one particular and popular sector, he notes: "Herding behaviour, for example, could be amplified by automated advisory services in portfolio management. Robo advisors might exacerbate financial volatility and pro-cyclicality if the assets under management reach a significant level, which is not yet the case."
To mitigate the risks, it is essential to get a clearer picture of fintech firms' business activities, says the central banker, adding that it is vital for the Financial Stability Board to investigate and promote data availability.
On regulation, he says: "Our aim is to develop a set of common criteria for the regulatory treatment of fintechs.
"Fintechs should not base their business models on regulatory loopholes. Using lax regulation to attract business is a mistake that was already made before the latest financial crisis. Whatever we do, we need to avoid a regulatory race to the bottom. Rather, we should go for a level playing field."
Weidmann says that central banks should not just promote stability through regulation of providers but also the promotion of economic and financial literacy, observing that the Bundesbank recently revamped its Money Museum.
"Incidentally, one of the most popular exhibits at the new Money Museum is a 12.5 kg bar of gold from the Bundesbank's vaults, which visitors are invited to touch and feel. While this exhibit may be of minimal educational value, it does show that even in the age of digital finance and dematerialised money, people still appreciate tangible values."
Speaking at the same event, Bank of England governor Mark Carney spelled out the potential of fintech to displace the current universal banking model as new entrants gained access to previously closed payment systems. On the one hand this would be beneficial in removing the prospect of a single point of failure by spreading the risk to financial stability among a larger group of players. One the other: "Changes to customer loyalties could influence the stability of bank funding. New underwriting models could impact credit quality and even macroeconomic dynamics. New investing and risk management paradigms could affect market functioning. A host of applications and new infrastructure could reduce costs, probably improve capital efficiency and possibly create new critical economic functions. In order for fintech’s potential to be realised, authorities must manage its impact on financial stability."